Gobbling up value in the pantry

Food producers appealing in today's market, analyst says

NEW YORK (CBS.MW) -- Stocks in the pantry sector are stuffing value investors full of hearty opportunities this Turkey Day.

"We have not curried favor with investors for some time. And now that looks like it's changing."
Leon Teitelbaum,Merrill Lynch

Food processing companies that have strong earnings and quality products make for appetizing plays, Merrill Lynch food analyst Leonard Teitelbaum said. And the promising ones aren't hard to remember -- many consumers will serve up their brands as they set their Thanksgiving tables.

Teitelbaum told CBS MarketWatch how a return to fundamentals is giving investors incentive to take a second helping of some food stocks.

Who's putting Tom the Turkey on our tables and should we be buying their stock?

Con Agra owns Butterball Turkey. We think Con Agra
CAG, -1.20%
is really a very inexpensive stock today. They just purchased the brand names of International Home Foods so now they probably have the leading stable of million-dollar brands out there. Next to Kraft, this is the largest U.S. food company with over $24 billion of revenue. They do everything from dirt to dinner, from fertilizer and herbicide applications all the way up to finished products. Healthy Choice is their brand name that many people will recognize and they have several others.

People like Tyson Foods
TSN, -1.14%
which is primarily poultry, also see their stocks typically looked at in this period. Tyson is not really a turkey player but clearly they have an interest in this whole area.

We also have a little company out there called Hormel
HRL, -1.43%
that we know primarily know as a pork-related company with very strong brands. But they also own Jennie-O, a large turkey company but it's more in the value-added breast-type product that we find people buying for an additional product. They may make a whole turkey and add a turkey breast. We have a lot to look at besides the commodity-branded turkey that we see on the shelf.

This is going to be a good year for those who sell turkeys. We're looking forward to this being a pretty good quarter for that group.

Is your confidence driven by consumer confidence? Do you think people will buy more this year?

That's part of it. In the surveys that we've seen, there's going to be a lot of home entertaining, which there always is. You have to eat someplace, and it's usually also a big day to eat out. But we're suspecting the at-home consumption is actually going to be higher this year than last year.

What stocks can we be most thankful for? What are your picks?

I like General Mills
GIS, +0.07%
here. You have to look at the food group as two groups of stocks: One where they say 'What happened?' And the other where they say 'Let's make it happen.' General Mills has made the pending acquisition of Pillsbury
DEO, -0.86%
that's going to change their mix substantially. We used to look at Mills where 50 percent of their earnings came from the cereal division. That's going to be reduced significantly with the addition of Pillsbury.

Further, in the acquisition, General Mills had to post a rather large escrow account to protect the purchase price of Pillsbury. If it does well in earnings and the stock responds, they can get part or all of that escrow fund back depending on the level of stock subsequent to closing, which means management has huge incentives to make sure they drive their numbers and post better-than-expected results. We think this accrues to the shareholder very nicely.

Sara Lee
SLE, +18.80%
is also a stock that we like. It's a company that's changing the way they will look in the future. We've seen the sale of PYA/ Monarch, the public offering of Coach
COH, +0.69%
and the announcement that Champion Fleecewear will be sold, which means that Sara Lee -- which really is a true consumer conglomerate and doesn't fit neatly into the food camp 100 percent or consumer products 100 percent -- is getting their product profile to where the comfort level is increasing. The stock here is inexpensive and we would buy it again on the theory that we want to buy stocks that make things happen.

Speaking of comfort, how are the comfort foods doing? How is Campbell Soup faring?

The difficulty Campbell
CPB, -0.06%
has had is that the weather has been too warm and soup is a cold-weather food. Clearly that's important.

The last quarter did show better growth in the soup section of the company, which is absolutely required for Campbell to do well. They also own Pepperidge Farm, which is improving and we're looking for Campbell's earnings to be slightly higher.

With consolidation going on in the food industry today, the big question is not what will you earn but will you be bought? In Campbell's case, they have been approached by several people just testing the water and it's one we have our eye on.

What's your rating on it?

We're neutral on a fundamental basis in the intermediate term, but if one were to play the takeover game certainly one would look at the stock.

Do you have any other picks?

Hershey
HSY, +1.71%
has solved the problems that were mechanical not product problems. We think earnings momentum is going to build strongly. We have an accumulate on Hershey today, but we think if there's going to be any stock that's going to surprise us with better-than-expected fundamentals, it's going to be Hershey.

Are investors warming up to the food sector now that technology stocks are down?

There's no question that as part of the consumer non-durable area, we have not curried favor with investors for some time. And now that looks like it's changing.

As the market becomes more disenchanted with some of the higher profile stocks like the dot-coms and is looking for a more balanced approach to investing, our group had a lot to offer. If we overlay that with the interest in consolidation that's been going on that accrues to those stocks that are being courted very strongly, the food group has reacted significantly better recently and we think for the balance of the year and well into 2001.

It's been a great combination of circumstance: consolidation and a return of interest on a fundamental basis.

This sounds like typical value investing.

It is value. We have companies that have good solid brand names. Every investor can open up their pantry and see product out there. They bought it for a reason, and that is that they thought the quality and the price-value relationship was there. This has always driven these stocks.

Are we in a new era? To some degree we certainly are, but some of the solid fundamentals come back. Right now we think good price-value relationship both in product and in P/E multiple and in EBITDA multiple, these stocks look good so we're rather positive on the industry right now.

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